The copyright clash

By Wang Fei'er in Shanghai Source:Global Times Published: 2012-1-12 13:53:30

Over the last few months, China's video websites have been engaged in a pitched battle over copyrights. The conflict escalated in mid-December when the sector's two YouTube-like heavyweights, Youku and Tudou, filed lawsuits against each other, each claiming that its rival had infringed on its copyrights.

The lawsuits are the latest fallout to emerge from the State Administration of Radio, Film and Television's (SARFT) efforts to curb online video piracy. Since the crackdown began in November 2010, domestic video websites have been under growing financial pressure to illegally offer copyrighted videos due to the rising costs of licensing television shows and movies, experts said.

Copyrighted content on Chinese video websites accounts for around 70 percent of all the films and TV programs shown online, according to a report issued by the National Copyright Administration of China on earlier this month.

For Youku, one of the few listed Chinese video sites, the cost of purchasing content in the third quarter of 2011 grew 155.72 percent on an annual basis to 67 million yuan, accounting for 26 percent of the company's overall costs, according to a summary of its latest earnings statement. That's up from 26.2 million yuan ($4.16 million) in the third quarter of 2010, when content costs accounted for only 17 percent of its total expenses.

The rising cost of content has taken its toll on the bottom line of Youku and other Chinese video sites. Youku reported a net loss of 47.47 million yuan in the third quarter and expected to lose 160 million yuan in 2011. Meanwhile, Ku6, another popular video site, reported that its estimated losses for 2011 would reach 400 million yuan, according to company earnings statements. Annual estimates were not available for Tudou, though it did report total losses of 134.5 million yuan in the second and third quarters of 2011.

"The soaring price of copyrights has led to financial losses for the majority of domestic video websites and has forced them into a fierce battle over copyrights," said Hu Yanping, a founder of Data Center of China Internet, a provider of data about China's Internet industry.

One video website, 56.com, announced in March that it would refocus its business on user-generated content because it could no longer afford the cost of licensing copyrighted movies and TV shows.

The regulatory reaction

In November 2010, SARFT issued regulations aiming to strengthen intellectual property protection for movies and TV and radio programs, as well as crack down on online piracy, according to a report from Xinhua News Agency. The administration called for greater oversight over video websites to ensure they had licenses to the content on their sites. Video websites such as Tudou and Xunlei responded by removing popular but unlicensed American TV shows, like Desperate Housewives, from their sites.

Since SARFT began its crackdown, copyright issues have become the main bone of the contention in the domestic sector as websites have become more reliant on licensed movies and TV shows for their business models. The competition has caused copyright licensing costs to skyrocket.

For example, in October, the Chinese Internet giant Tencent signed an agreement to pay 1.85 million yuan per episode for the rights to Palace, a Chinese time travel melodrama that was one of the most popular shows of last year, the newspaper Beijing Daily reported on October 21. In 2009, the rights to show the hottest series on TV, a historical melodrama called Latent, fetched just 10,000 yuan per episode.

The pressure to push up prices

The rising cost of licenses stems from a peculiarity of the Chinese online video market, which encourages websites to bid up the price to license content.

Unlike in the US, where film and TV studios almost never release content on the Internet before it airs or hits theaters, websites in China can premier movies and TV shows. This practice became common before SARFT announced its regulations. In those days, copyright enforcement was so lax that the websites had little fear of lawsuits or criminal prosecution, so they rarely bothered to obtain the proper license from copyright holders. This allowed them to show movies and TV programs before they premiered in theaters or on TV, which Chinese users quickly became accustomed to.

To meet this expectation, large video websites now try to obtain exclusive copyrights for popular TV shows so they can still be the first to show them, said Li Ya, chief operating officer of Phoenix New Media, a video website under the Hong-Kong based company Phoenix TV. They do this by trying to outbid their competitors so they can release the video as early as possible to obtain the maximum advertising revenue.

It comes at a cost, however. Video websites typically pay 30 percent more to license exclusive content or for the right to premier a show, said a Tudou executive who asked to remain anonymous. Furthermore, sites that have secured exclusive copyrights are likely to sell them to competitors at unreasonable prices, Li added.

Tudou has spent at least 300 million yuan to secure the rights to 70 percent of the TV shows that will air in China this year and 40 percent of those that will air in 2013.

The company has already incorporated copyright dealing into its business model by selling licenses to other video websites, provided they are willing to meet Tudou's price, the executive told the Global Times. Sohu, Youku and Tencent also deal in copyrights in the same way.

Video websites are not only spending more for each license, but are also - like Youku - devoting more of their budgets to purchase copyrighted content, Hu said. Because Chinese viewers aren't particularly fond of user-generated content - home pet videos, for example - they have become more reliant on hot TV shows and blockbusters to make money.

These videos can fetch advertising prices that are 30 to 100 percent higher than the user-generated content, Gong Yu, CEO of iqiyi.com, told Beijing Business Today on November 18.

The case for collaboration

Even though companies are losing money under the new copyright regime, it doesn't mean the government should roll back its regulations. "That would be throwing the baby out with the bath water," Li said.

In the long run, better copyright protection will encourage film makers to improve the quality of their movies and will ease advertisers' concerns about the legal liabilities of sponsoring unlicensed videos, Li said.

Video websites would be better off collaborating with film makers or other copyright holders that can offer their partners cheap or free licensing agreements, said Zu Chen, Tudou's editor-in-chief. An example of this is Hulu, a US-based video website. As a joint venture of three media giants - NBC Universal, Fox Entertainment Group and Disney- ABC Television Group - Hulu doesn't have to pay licensing costs to show its parents' videos.

Zu also suggested that Chinese video sites should invest directly in movies and television production. Either way could help them cut licensing costs.